 I just ate up the one remaining minute. I mean, you know, I want to give you guys your money's worth, but no more than that. All right, this is going to be a bit of a potpourri here, because there are a bunch of different issues I would like to tackle under this overall heading. When this topic was proposed, I found out later that what Joe Salerno had in mind was that, at least for some portion of it, that I might comment on the thesis of Gabriel Colco, because he's a historian who died not that long ago, and Rothbard was quite fond of his work. Colco didn't like the fact that Rothbard was fond of his work. His Colco was a leftist, and he thought, how come the leftists aren't getting my point, and only Rothbard is? Just, I'm sorry to do a show of hands, but I am curious to know with how many of you does that name Gabriel Colco ring a bell? Okay, all right, a handful, all right. Oh, well, good, all right, well, that's why you're here, right? You get to learn stuff. All right, so here, it's going to be four things that I'm going to do. First, I'm going to do some history, American economic history, entrepreneurial history, looking at real live examples of American entrepreneurs, because there's a lot of warnings that are largely theoretical about how dangerous so-called monopoly can be on the free market. And I want to give you actual examples of people who were accused of being sinister and terrible and let you decide for yourselves. Secondly, I want to take a revisionist look at the data to determine whether or not these people, these business figures in the late 19th century were really guilty as charged. Were they, in fact, monopolists in the standard textbook definition anyway? Then thirdly, I want to look at the issue of so-called predatory pricing, which comes up in this context, because this is the means by which it is alleged a lot of people have acquired a monopoly position, and that is by driving all their competitors out of the market, by pricing their goods below cost. This is the standard way you will hear it described, and I want to talk about the problems with doing that. It sounds easy when your friend describes this strategy to you and says this is how the free market works, but it's actually quite difficult to implement it. And then fourth, I will explain to you what the Colco thesis was and then give you my own analysis of it. Now, I can speak only for the American students here, but I can say with certainty that unless you were homeschooled, you got the same version of American economic history that I got when I was in high school, certainly. Actually, beginning in junior high, I think we all got the same thing, which was that back when we had the bad old Neanderthal as a fair economy, monopolists ran rampant and exploited consumers and exploited workers and took advantage of everybody and thank heavens, eventually, wise public servants intervened and put a stop to this, and as a result, we have the level playing field of today. And I would say every aspect of that story is wrong. Now, I'm not going to talk about labor history today, but I will refer you to a reading on that if that interests you. So that's really what I'm using this for. I'm extremely low tech. The idea of having a screen and a marker to me is the highest tech presentation I've ever done. So I would refer you to, oh, hey, this still amplifies, even when I'm over here, how about that? Okay, so I'll refer you to... Let's make sure... Yeah, okay, so we'll start. Okay, good, okay. You can Google this article and for people listening, I think it's around 1990, but you wouldn't need to know that. You can just Google it. The article is Charles Baird, who is a labor economist and historian, really, too. Labor Law Reform Lessons from History. It really is... I mean, the reform stuff takes up a tiny sliver of the article. It mostly is a historical review of major episodes in American labor history. And normally, when you read these episodes, they have... it's just a big morality play. You know, the big bad owners and the terrible oppressed workers. And they treat them as two groups, owners and workers, as if workers are all just one blob. When it turns out they're all different kinds of workers. There are union workers. There are non-union workers. There are workers who belong to Union A. There are workers who belong to Union B. There are workers who belong to Union C. This is all left out of the standard account. They're all workers who all agree against the owners. What Baird actually does in this article, by the way, is a great example of what you guys can all do, which is he doesn't do a lot of primary research. He just goes back and he reads the New York Times accounts of these events written by contemporaries. And he just interprets it differently. And it turns out that you can find a free market non-sinister explanation for how the owners behaved in case after case in these 19th century cases, whether it's the Pullman strike or the truth about what happened at Haymarket or whatever. He's got it all in there. And just by not looking at it through a unionist lens, he's able to tell you a different story. So I'm not doing labor stuff, but I do want you to know about that article. Okay, so there's the traditional caricature. Then we have something a little different thanks to Bert Folsom. So some of you will know about this book, but if you don't, you have to get it immediately. I believe the first edition came out in the late 1980s or early 1990s. The myth of the robber barons. A new look at the rise of big business in America. This is a short book. You can read it in no time at all. And Folsom took down the caricature by composing biographical sketches of American businessmen and entrepreneurs that you're familiar with. So there are a lot of people who are covered in this book, and he shows that the analytically helpful distinction when studying people like this is between what he calls political entrepreneurs and market entrepreneurs. That's the central thesis of the book. A market entrepreneur is somebody who prospers by offering people a product at an affordable price that that person wants. And that person gets ahead in that way, that particular businessman. But then on the other hand, you have the political entrepreneur who prospers by getting special government privilege. He says, if we leave those people out because they do deserve our moral censure and we look only at the market entrepreneurs, there's nothing to be upset about. They have done nothing to harm us. The only reason, I don't think Folsom says this, the only reason we might dislike them is out of sheer envy. And you cannot underestimate, by the way, the power of envy. That Helmut Schuch book called Envy, I've got to, I've heard so much about it, I've read reviews of it, I've got to get to this thing because it apparently makes an overwhelming case for how dominant envy is. Because apparently, I mean think of it this way, I'll just put this in parentheses. Remember in my opening talk, I talked about Rothbardian welfare economics and he said that when you have two people voluntarily entering into an agreement and each of them winds up better off, therefore we know social welfare has been increased. But today, a CEO receiving a voluntarily paid salary is made better off. Both parties to that are made better off. But there are a lot of envious people in the country who are made worse off because they're so envious and bitter that their welfare has decreased through this. And so maybe it is actually indeterminate whether social welfare has gone up or down. But my own view would be those people's opinions don't count because they're jerks. Okay, so I want to give you some examples of market entrepreneurs. And I like to give the example of Cornelius Vanderbilt and just focus on his time in steamboat traffic. Because as some of you may know the history here, but in New York there was a monopoly granted to Robert Fulton and Robert Livingston. They got a monopoly on all steamboat traffic in New York for 30 years. On the condition that they could get a functioning steamboat up and running within two years. So they did that. Now naturally when you have a monopoly that's, and in this case of course Rothbard would say that the only meaningful definition of monopoly is a government granted privilege, an exclusive privilege to offer some good or service. Well obviously the fares are going to be higher than they would be under conditions of normal market competition. So a New Jersey steamboat guy, Thomas Gibbons, hires a man named Cornelius Vanderbilt to defy the New York monopoly. To have him actually run passenger steam traffic and try to evade capture. Because you're not allowed to do this. Going to New York, well New York, there's a monopoly on steamboat traffic. He's not allowed to break it. But he was running it constantly and charging much lower fares. And he got a kick out of this. He enjoyed doing it. He hoisted a flag on the ship saying New Jersey must be free. We've got to break this monopoly. So he goes from Elizabeth, New Jersey to New York City starting in 1817. And he manages to evade capture. Well eventually, again as some of you may know with the basic outline of the story, the court strikes down the monopoly. I don't know if that's one of the cases the judge is covering, but I guess you guys wouldn't know because you're not in that seminar. You're stuck with me. But Gibbons versus Ogden was the case from 1824. So now Vanderbilt can run a steamboat and not worry about the authorities. And immediately the fares go down. So the trip from New York to Albany goes from $7 to $3. So everybody going from New York to Albany now has an extra $4 to spend on something else or can go at all because they couldn't have gone at $7. Vanderbilt at this point seeing limitless opportunities makes his break with Thomas Gibbons and strikes out on his own and establishes all kinds of routes all over the place in the northeast. The trip from New York to Philadelphia under Vanderbilt goes from $3 a fare of $3 to a fare of $1. New Brunswick to New York City $0.06 plus free meals. Eventually he lowers the fare from New York to Albany down to zero and he figures if people are hungry I'll feed them on board and meanwhile I'm putting pressure on my competitors. New York City to Providence goes from $8 to $4 and eventually all the way down to $1. And very significantly the New York Evening Post refers to Vanderbilt as, quote, the greatest practical anti-monopolist in the country. Anti-monopolist, right? This guy we're all supposed to hate for some reason. If you haven't come upon any reason we're supposed to hate him yet I agree with you. I still don't see what the problem is why we're not supposed to like him. Now I suppose one reason could be that after he died that he turned out to be the least generous, let's say, when you compare him to Andrew Carnegie and Rockefeller who gave away hundreds of millions Vanderbilt didn't really do that. He endowed Vanderbilt University and then he didn't really do that. But all the same he had obviously improved his welfare by making transportation accessible to a great many people and lowering the price. Harper's Weekly said this about Vanderbilt. He said that they said that what Vanderbilt has done, quote, must be judged by the results and the results in every case of the establishment of opposition lines by Vanderbilt has been the permanent reduction of fares. So everybody's better off here. In the late 1830s and especially into the 1840s the British now begins subsidizing steamships. The British government begins subsidizing steamships. So it becomes fashionable in the United States to advocate the same thing. If the British are subsidizing steamships we don't want to be like some loser country so we should subsidize them too because in doing so we will be able to demonstrate to the world the great shipbuilding ability of the United States. We can flaunt this. This will also assist in the delivery of the mail overseas and also it will give us as a subsidiary benefit a potential military fleet to use if war should break out. So a guy named Edward Collins pledges to the U.S. Congress that he will outdo the passenger service of the British if he can just get a down payment from the U.S. Congress of $3 million plus $385 grand a year he will go toe to toe with the British. He's going to build five small to moderate size ships and he'll deliver the mail as well. Congress goes along with this. Congress also gives a half million dollars per year to two lines that would get mail to California one line going from the Atlantic to Panama and the other one going from Panama to California. Now Collins winds up building only four ships but they're absolutely enormous and they become notorious for their ostentation and luxury. I mean these are ships for the cream of the crop. The average Joe is not going to be able to sail on them and they're not really cost effective. They're just, they're big and lumbering. So he winds up having to go back to Congress for a bigger subsidy. So what is it, what do you suppose he does? So he winds and dines congressmen, winds and dines, people in the administration, lobbies heavily and he gets the annual subsidy increased to $858,000 a year. Now he'll make it work. Meanwhile a Kentucky congressman, John Breckenridge said that this increased subsidy had been brought about quote by the most powerful and determined outside pressure I have ever seen brought to bear upon any legislative body. Well meanwhile 1855 Vanderbilt is still on the scene and he pledges that he can deliver the mail for less than half of what they're paying Collins but the Congress continues with Collins. They stick with their original horse. In 1855 however, President Franklin Pierce surprises everybody by vetoing the Collins subsidy bill that year. Now this is a surprise, today this would be a complete shock that a standard renewable annual subsidy would actually be stopped by somebody. But Pierce said this, that if I were to grant this subsidy he said doing so quote would be to deprive commercial enterprise of the benefits of free competition and to establish a monopoly in violation of the soundest principles of public policy and of doubtful compatibility with the Constitution. I remind you by the way that historians hate Franklin Pierce. They just can't stand this guy because he didn't do enough. He just vetoed things. There was a bill by the way to provide for I think mental health facilities and he said this is a very wonderful intention that people have but there ain't no support for it in the Constitution so historians just think this guy's just a pathetic jerk. But when you hear even a president say things like this it does kind of, I don't know, brightens my day a little bit. Well he was unsuccessful though because they got Collins' subsidy rammed through by forcing it into a naval appropriations bill. So it's just like today. You can't get it one way. You figure out some sneaky way to get it in up. So Vanderbilt then is just going to compete with no subsidy, no payment. He's just going to deliver the mail on his own, no problem. So he comes up with all kinds of creative ways to save money and he also carries second and third class passengers. The Collins ships were so fancy it was all first class. I mean it was really like what the airlines were like until the despised non-skeds came along and began to cater to the average person. No frills kind of trip. Well likewise Vanderbilt realizes that I can make a ton of dough by offering no frills accommodations. The subsidized California lines meanwhile were being paid $600 as a fare to get people to California. And Vanderbilt is able to charge about $150 and he's not being subsidized. By the following year 1856, two out of Collins' four ships have been sunk leading to the deaths of about 500 people. So he spends a million dollars of government money trying to replace them, building this huge replacement that was so cumbersome it was able to make a grand total of two trips and then had to be sold at a $900,000 loss. This is the guy who's getting the government favors. A U.S. senator from Virginia said the whole system was wrong. It ought to have been left like any other trade to competition. A U.S. senator from Kentucky said give neither this line nor any other line a subsidy. Let the Collins line die. I want a tabula rasa. The whole thing wiped out and a new beginning. Well, again, sound things being said incredibly. In 1858 finally the Collins subsidy was revoked. Collins is just going to have to operate on his own merits and you'll never guess he goes bankrupt. How about that? Vanderbilt becomes the leading operator of steamships in America and there's your story of Cornelius Vanderbilt whom you're supposed to hate. I'm still not seeing it. I love this guy. It seems pretty good to me. Another guy who is either, you're either supposed to hate or you're not supposed to know about him at all. Historians can't quite figure out which is the better approach in the classroom. Usually it's just don't tell you about him and that's James J. Hill. Now you may know about him partly from if you've read the Folsom book but also from Tom Di Lorenzo. Let me give you another Folsom book by the way. Brand new one just came out this year. I just had him on my TomWoodsRadio.com podcast to talk about it and now I can't think what it's called. Oh yeah, it's called this. He wrote this with his wife so my first question was tell me what it's like writing a book with your wife. Does it bring you closer or does it alienate you from each other? Then he gave a very diplomatic answer to that. The book is Uncle Sam Can't Count and it's one of these three paragraph subtitles about the problems with government investments of various kinds. So that's also a fun book to read, very informative. So Hill is featured in both of those Folsom books. Well for the story about James J. Hill you have to give the background of railroads in late 19th century America or at least after the Civil War. And the gist of this is that the government subsidized the building of many railroads and it subsidized it in two ways. One was to give land grants to the railroads and the idea of the land grants was that the railroads would sell the land for cash. They would sell the land to settlers for cash and then would use the cash to fund their operations. And in doing so, of course, they're also building in a market for the services of the railroad because if people are living alongside the railroad their fortunes are going to rise and fall with those of the railroad so they have a built in market for their services. And also low interest loans. Can't see any problems arising from offering low interest loans to anybody. So those two were the main forms of subsidy. So land and loans were granted in proportion to the amount of track laid. So the more track you put down the more free goodies you get. And this means that there is a well of course a perverse incentive built into this. That you're not so concerned maybe with the quality of the track or the amount of curvature because normally you would think I want to build the shortest possible route to save money. If this is A and this is B I want the route to go like this. But if I'm getting extra dough the longer the route is maybe I want the route to look like this. Or if I'm getting more subsidies if the line goes through mountainous territory then I'll go through mountainous territory. Or I'll just lay track like there's no tomorrow. I'll lay it down on ice and then we'll cross that bridge when we come to it next year when we have to inevitably rip the track up and start over again. We just got to get the subsidies while the getting is good. I can't confirm this by the way so if anybody is from Long Island come talk to me afterward but I recall once in a while when I used to live on Long Island I would come home from the airport taking the southern state parkway. And the southern state parkway goes like this the whole time you're heading back from the airport I would do that sometimes when I was tired because I knew it would keep me awake making all the turns all the way like this and I heard that that was actually laid down on the same sort of principles and that's why it's so curvy. It's not like there were just huge rocks everywhere and so they had to do it this way. I can't confirm that but I would like to hear from somebody who knows. So meanwhile, okay, so you've got the two major lines that are going to meet up and form the transcontinental railroad that's been so long desired are the Union Pacific and the Central Pacific. Now we haven't yet gotten to James J. Hill. So the Union Pacific and the Central Pacific eventually meet up in Utah but as they approach each other they realize if we meet up we stop getting subsidies, right? It's all over. We don't get any more subsidies. So they meet up, they meet up, they meet up and then they just keep on going. They just build the track parallel to each other and then both of them apply to the federal government for subsidies on the basis of the parallel track. They start blowing up each other's track. It becomes very unpleasant and then they take this picture of them when Congress finally forces them to meet. They take a picture and they're all friends. Sure we just tried to kill each other five minutes ago but say cheese. So that's the background of what's going on. Hill is not doing any of this. Hill is not getting government subsidies of any kind. Hill is the sort of person we're told does not exist. He comes from modest means, very modest means. He worked in a grocery store as a kid to support his family because his mother was a widow. He lost the use of his right eye in an accident. He's got all kinds of disadvantages but nevertheless he and a group of other Canadian investors eventually buy out an incomplete and bankrupt line that eventually they transform into the great northern which is going to go from St. Paul to Seattle. And throughout the history of this line while Hill is involved the fares consistently go down. So again not really fitting into the standard morality play involving monopoly in which the fares are supposed to go up because the monopoly is strangling everybody and choking them to death. That didn't happen. During the 1893 recession when other railroads were going bankrupt Hill was turning a profit and doing very well and still keeping fares low and he even privately kind of exalted in this. Like they were all saying that this would fail or that if other railroads went down we'd go down but look they're all in bankruptcy and we're still standing. And he said things like he was fully aware that he got no subsidies and others did and he celebrated the fact that it showed that it's possible to compete honestly. And of course he wants to help settlers along his route he has to build in his own he doesn't get the land grants he has to build in his own market so he imports thousands of cattle from England and he gives them to settlers because he knows that he's going to prosper or fail as they prosper or fail. He establishes experimental farms in order to test new seed and livestock and equipment. So he becomes extremely efficient he of course naturally wants to limit the amount of track that he's laying he doesn't want to be in the situation of the chief engineer of the Union Pacific Grenville Dodge who looked at the finished product and said I never saw so much needless waste in building railroads. Well you never saw so much efficiency as in the case of James J. Hill. He said that what we want is the best possible line the shortest distance, the lowest grades and the least curvature that we can build we do not care enough for Rocky Mountain scenery to spend a large sum of money developing it. And then he said it really seems hard when we look back at what we've done in opening the country and carrying at the lowest rates that we should be compelled to fight political adventurers who have never done anything but pose and draw a salary. So in 1893 when the railroads many of them had gone bankrupt and they're begging the government for special loans Hill really stuck the dagger in and said the government should not furnish capital to these companies in addition to their enormous land subsidies to enable them to conduct their business in competition with enterprises that have received no aid from the public treasury. Well then around 1906 we get the federal government enacting something called the Hepburn Act the Hepburn Act which is cheered by every US history textbook on the market today and forces an older requirement that railroads have to charge the same rates to all shippers. Well Hill had been charging lower rates giving discounts to shippers who were shipping freight to the west coast for the purpose of selling to markets in Japan and China. Hill wanted to play some role in opening up these markets to American products like cotton and wheat and to facilitate this he said that if that's your intention that's what you're going to do with your freight I'll give you a special discount if you ship that freight on my line. But now the Hepburn Act says he can't do that if he's going to offer that discount he's going to offer it to everybody and he can't afford to offer it to everybody so he starts to offer it to nobody and now the egalitarians are satisfied now everybody pays the higher fare as opposed to the discount so what yay for social justice it has triumphed and by the way when you look at statistics for US exports to Asia around that time you see that they actually do fall noticeably in a non to a non-trivial degree. Alright so those are two examples I'll give a couple of brief ones so we can move on to the other sections but Andrew Carnegie in steel almost single-handedly managed to reduce the price of steel rails by almost 90% in the last quarter of the 19th century and of course we can see how that would that would help the whole economy almost everything in a modern economy in the production process uses steel so if he can keep that cost low that has a ripple effect through the whole economy he was so efficient that the 4,000 people who worked at his homestead plant in Pittsburgh 4,000 people at that plant in Pittsburgh were able to produce three times as much steel as the 15,000 people who worked at the Krupp Steelworks in Germany which was Europe's most modern and renowned facility now it's true that for a time you know there are caveats here Carnegie did support steel tariffs but he did substantially reduce the price of steel rails so this political position that he took did not have harmful effects on the consumer or other people will point to the Carnegie Foundation the Rockefeller Foundation they'll say these foundations have done terrible things and sure they've blown a lot of money on stupid and evil projects that's true but that's irrelevant to the question of Carnegie as an entrepreneur or likewise John D. Rockefeller boy is it fashionable to hate John D. Rockefeller but he was able to reduce the price of kerosene from one dollar a gallon to ten cents a gallon and so people could afford to illuminate their homes it was a new thing for people after dark to be able to do some work around the house to read this was new in the 1870s and they could afford to do it because of Rockefeller he gets into oil refinery and so in the process of refinery of course you have a lot of waste you have a large quantity of waste product and Rockefeller doesn't like the idea that he's got this waste product there's nothing he can do with it so he comes up with 300 products out of the waste now we hear that Rockefeller was an unfair competitor because he engaged in so-called predatory pricing we'll get to predatory pricing in just a minute well it turns out that this is not actually how Rockefeller achieved his domination of oil refinery where he would get up to 80 to 90% of the market and by the way by the time the federal government got around to hauling him into court in 1911 his market share had already been reduced to 25% just through normal market competition so that they finally get him in there you know okay we need to break you up but you're already kind of small now so we're going to break you up anyway I mean that was what happened to him well there's an article by John S. McGee that your professors will not know about I absolutely guarantee you this is the Journal of Law and Economics I think it's 1958 yes see if I were David Gordon I would know that it's October 1958 and I would know the page numbers by heart 137 69 I've seen him do that by the way I'm not joking not joking if you guys don't realize what you have here in David Gordon you've got to talk to him for a while don't let him tell you any jokes though it turns out that what Rockefeller did was he bought out his competitors now okay a lot of people say well that's no better but that was you know it's legitimate to buy you know another company and he would do that and apparently paid them reasonably because then he turned around and employed these people he employed the managers he employed the workers so if he had screwed them presumably he wouldn't want these bitter people sticking around waiting to sabotage his operation there's a case of at least one person who opened three different refineries and sold each one of them to Rockefeller open one sell it open a new one sell it open a new one sell it worked out well for him but meanwhile the prices fell time and again alright now let's see I want to so I've done Carnegie and Rockefeller I just want to make sure I don't leave out the Tom Di Lorenzo stuff because he has done such important work for us okay yeah here it is okay good okay so Tom Di Lorenzo did some important work in the International Review of Law and Economics in 1985 wow 29 years ago he is old right he did this he wrote this article in which he tried to evaluate the claim that the US economy was dominated by monopolists that all these industries were monopolized by one or a handful of firms so he thought he would go and go back and look at the data now for that I'm going to assume you got all this so for that if you don't want to dig out the journal the International Review of Law and Economics he did a popular version it's got all the data in it and all the citations in his book How Capitalism Saved America now you know so it's got a playful title and thing is that he and I have both written books that have playful titles and it makes it sound like well there can't be anything valuable in here but it's misleading there's a lot of valuable stuff in this book and that's where he took a lot of that stuff from 85 and put the data in there so what he found he actually bothered to look he says alright the neoclassical economists are going to say that when you're dealing with monopoly you're dealing with an antisocial restriction of production that results in higher prices he says okay well let's look he finds 17 industries for which data is available where there were accusations of monopoly he says alright well let's just see were they restricting output or not and it turns out no it turns out that the industries that were alleged to have been monopolized their output rose 175% during the 1880s when real GDP rose 24% so so much for restriction of output what about prices well prices were falling by about 7% in the economy as a whole but much more substantially among in those industries that were alleged to be monopolized so the exact opposite steel rails go from 68 dollars to 32 dollars a ton during the 1880s zinc falls by 20% refined sugar by 22% this pattern holds true for all 17 of these supposedly monopolized industries with the trivial exceptions of castor oil and matches can you believe it took about 100 years for somebody to bother to look to see if what's in the textbooks is correct now I as I say I guarantee you there ain't no professor who knows about this article these guys just don't and high school teachers those of you who are fortunate enough to have your head screwed on this well at this age oh your high school teachers are going to run for cover if you ever bring this up well you know as it was shown in the international review of law and economics oh my gosh are you going to be hated if you bring that up alright so that's that D Lorenzo thing is very very good finally now on this I want to talk about or I want to move into the section on predatory pricing we'll do this sort of quickly ish predatory pricing is a theory that says that somebody can establish a monopoly position and by monopoly position they mean being the only firm or the firm that's so dominant that it's not worth thinking about the other firms and you can do this by lowering your prices to a point that your competitors can't match and that drives them out of business and then when they're this is the key when they're out of business then you raise your prices back up again and you enjoy this monopoly windfall that's how it's supposed to work and everybody thinks he can come up with an example of this we all think we've seen examples of this but what we've actually seen examples of would be retail stores that lower their prices and other retail stores can't match them and they go out of business and then that's it the then raising their prices high again is the part that we don't generally see in fact George Stiegler a Chicago school economist noted that this theory has fallen into disfavor in professional circles he actually says quote today it would be embarrassing to encounter this argument in professional discourse it's not embarrassing to your 12th grade teacher though because this is what you will get repeatedly but among professional economists this is embarrassing and as we all know it takes an awful lot to embarrass professional economists so that does mean something in case you are not familiar with this there's a great Austrian who specializes in antitrust and he's done a tremendous review of some of the key cases in this book he has another book called antitrust the case for repeal which is shorter this is more of a review of some of the major antitrust cases most of which you will never have heard of I won't spend the time writing out the subtitle but it's antitrust and monopoly anatomy of a policy failure very useful book if this is especially if this stuff is new to you he's a professor emeritus of economics from the University of Hartford and he surveyed all these antitrust cases and he could not uncover a single successful example of predatory pricing this strategy that we're told is just around us and it's just easy to do but it's actually not that easy to do for this and there's a good discussion of it in George Reisman's book capitalism which is only a thousand double column pages so you can just zip through that the book is a the book is a murder weapon they're thinking of including it in the next version of Clue by the way was he killed with a dagger? no he was killed with Reisman's capitalism over the head he has a very good discussion of this but one argument would be that let's say a firm has 90% of the market in something then if you're competing with let's say one other firm and that's got 10% of the market you're suffering losses during the predatory pricing strategy where you're pricing below cost you're suffering losses temporarily to drive your competitors out then you'll raise the prices you're suffering losses on your 90% share like why would that be brilliant you have nine times the wealth of the business but you're losing money at a rate that's nine times as great would you want to do that once you do drive all your competitors from the market you now have to drive prices back up without attracting new entrants into the field who then see the high prices and they want to jump in and moreover these new entrants will be at an advantage because your previous competitors will have gone out of business unable to match your low prices but when they go out of business they will typically go into bankruptcy proceedings they've got all these physical assets and they're going to want to sell them off try to make as good as they can with their creditors but that means that whoever buys them is buying them for pennies on the dollar and those people can enter now can enter this field very very easily and so now you'll have still more competitors that will be even more able to compete with you so now you'll have to make losses for for still longer so you have to further postpone the moment when you'll get your hoped for premium profits also during the period excuse me of below cost pricing when the would-be predatory firm is offering products at a very low price consumers stock up on the products at that time when I used to live alone and I would do my own food shopping once in a while progressive soup used to be 99 cents a can for the big size can now I now know that progressive soup does not actually have a lot of nutritional content I didn't know that at the time so I would stock up I would buy as much progressive soup as they would let me get away with and I would come in under new identities with a false mustache whatever I had to do to get the cheap soup and so that is makes go even longer before they can get the monopoly price because the consumers already have plenty of the product now Reisman gives this example he says there's a chain store variant of the predatory pricing model is if you're a chain store you've got locations all over the country you've got a whole lot of money you're earning profits from all these different stores so you can draw on the profits that you're earning in all your other stores to sustain you through the losses you're making in just the one let's say you're trying to break into a new market you're going to use predatory pricing drive everybody out you're going to break into that and to break into it you're going to use as a cushion all the profits you were in from your other stores so you're unstoppable basically you once you're a chain store you're unstoppable but Reisman says that's actually not true because he says let's stipulate that you've got a place called mega mark and they've got a thousand locations around the country and they've got a billion dollars of capital invested so they've got a million dollars per store and people warning of monopoly say that mega mark can bring its entire fortune to bear to drive all competitors from one particular market in which it wants to expand now leave aside all these difficulties with predatory pricing that we've just looked at let's suppose mega mark really could drive could use all its resources and it could drive all competitors out all potential competitors out because they would all be terrified that mega mark would crush them even still it does not make sense for mega mark to use its entire fortune because you think about it let's say mega mark returns 300 grand profit every year from a new store then you capitalize that into the future and it winds up being like it would be worth a 3 million dollar investment but no more for mega mark to get this flow of returns I mean now this is assuming we know what the going rate of return in the economy is and you know that this is problematic and so on but the point is there is a finite amount that it makes it worth mega marks while to do this for because you can capitalize into the future the stream of income that you expect to get from this particular store and it's not an infinite amount because there is time preference so you have to think about that so anybody who has 3 million dollars would be at just as competitive a level in bidding to try to get hold of that market as mega mark does which has a billion dollars it would not make sense the flow of income they are going to earn from that market does not justify pouring a billion dollars into it alright so finally another thing about predatory pricing the reason that we expect it not to work is this the market has a built in way to stop it and the built in way to stop it is through minimum and maximum resale price agreements and basically that would work this way think about what would happen now leave aside the fact that you don't like a lot of American pharmaceutical companies it doesn't matter it's just a good example suppose that Walmart is offering cheap drugs because it wants to use predatory pricing to become the only drug dispenser in the country and then it's going to jack the prices up what happens when Walmart jacks the prices up on drugs fewer drugs are sold economics 101 the price goes up fewer drugs will be sold merc doesn't want fewer drugs to be sold so therefore merc has an interest in making sure that Walmart does not become a predator because then it will sell fewer drugs so it can build this into its agreement with Walmart and the agreement would be a minimum resale price maintenance agreement it would say that you have to sell the product at at least this price so you can't sell it at a predatory level or if Walmart somehow if everybody at merc falls asleep and they find that Walmart has already done this then they can have maximum price resale agreements saying if you're going to try to then get premium monopoly profits you can't because your agreement with us is you can't sell above this particular level and now that cuts out the prospect of predatory pricing because now you can't raise the price to the predatory monopoly profit level because your contract with the supplier won't let you do it and the anti-trust laws forbid the use of minimum and maximum resale price agreements and yet they solve the problem the market solves the problem through that but I want to give you a flesh and blood example of predatory pricing and how you fight against it and this is an expanded version of a story I've told in the past but it's the example of the great chemical magnate Herbert Dow, American about a hundred years ago he's an extremely innovative chemical I don't know, manufacturer I guess so the key chemicals we're going to look at are chlorine which is used as a bleach and bromine so first we talk about chlorine chlorine is selling at $3.50 a hundred weight Dow gets into the business and in the mid 1890s just at that time the British they start lowering their price of chlorine to $1.87 Dow matches them he's got an efficient process he can match them then they cut it to $1.65 he matches them then they drop it to $1.25 and make a loss obviously trying to get rid of Herbert Dow other American firms drop out but Dow stays in in 1903 the price goes to $1.04 Dow barely hangs on but he stays in the British then say they'll sell for 88.5 cents so Dow said look there just ain't no way they're driving me out so in 1904 he enters into contracts with buyers that he will sell at 86 cents and as soon as he locks in those contracts the British say oh never mind we're going to sell at $1.25 so now they've manipulated him at this ridiculously low price and he's stuck because he's made all these contracts but he honors those contracts and that gets him tremendous renown that he somehow did this the British themselves come to respect him and no longer decide to pull this on him but the real story that grabs you is bromine because here the Germans are the dominant sellers and the understanding is the Germans sell this chemical which was used in film developing and for some other purposes but they're selling this in Europe and no one else is really allowed to sell other than the German cartel they're selling it at 49 cents per unit and he's selling it in Europe at 36 cents and he actually gets a visit in his office from a representative of this German cartel explaining to him that he, you know, we have evidence that you've been selling bromine in Europe and he said yeah as a matter of fact I have and they said I don't think you understand the rule is that you can't do that well I intend to do it and they threaten him they say well we're going to just drive you out we're going to crush you well he keeps on doing it so the Germans start selling at 15 cents and so Dow decides well if they're going to sell that cheap I'll buy so he uses his purchasing agent to purchase up huge quantities of this German bromine then he goes and sells it in Europe because he figures they've got to make a profit in Europe to sustain the unbelievable losses they're suffering in the US but now they can't because now they're making losses everywhere and they cannot understand what's going on why is the American demand so high so they keep on so then they get down to 10 and a half cents that'll show them so he just keeps on doing it well a representative before they figure out what's going on they meet with Dow again and they say look we're just going to keep flooding flooding you with cheap bromine indefinitely alright well I'll manage so as Dow leaves the meeting this guy is actually screaming threats at him well eventually they figure out what he's up to but they don't know how to stop it they don't really know what to do and Dow says when this 15 cent price was made over here instead of meeting it we pulled out of the American market altogether and used all our production to supply the foreign demand and this as we afterward learned was not what they anticipated we would do we are absolute dictators of the situation one result of this fight has been to give us a standing all over the world we are in a much stronger position than we ever were so Dow just stuck it out and turned their own strategy against them in fact his lawyer said to him your mind does not work according to any normal law but it makes him great alright let me close with just a brief overview I guess I have enough time of the work of Gabriel Colco and for here the two key books would be railroads and regulation and the triumph of conservatism let me give you the background on Colco Colco was a leftist actually and the point of his work was to try to show other leftists that attempts to reform capitalism were fruitless it couldn't be reformed because your attempt to reform it would be hijacked by the very people whose behavior you were trying to reform the business firms would dominate the regulatory process you were trying to use so of course you can see why this is a congenial thesis for free market people who would say yeah so don't be naive about what regulation can achieve it tends to be dominated by the industry or the big firms and there is something to this by the way I don't want to suggest to you there's nothing to this thesis at all there is something to this and Stiegler whom I mentioned earlier has a whole capture theory of regulation the regulatory bodies tend to become dominated by the industry that they're dominating either because there's a revolving door between government and the industry or even sometimes because the regulators themselves gradually come to be more or less absorbed into the world that they're regulating they've come to use the same language of the people that they're regulating and it becomes hard to tell at the end of the day which one is a pig and which one is a human being that's an animal farm reference I'm not trying to say that they're actual swine although if the shoe fits I suppose alright that's what Kolko is about so he's trying to tell people if you want to reform capitalism forget it replace it with socialism alright well that conclusion is obviously not going to be leaped upon by libertarians but they're interested in this thesis so when Kolko says the triumph of conservatism he's not talking about Edmund Burke or Pat Buchanan he doesn't mean that kind of conservatism he means he's talking about the progressive era the early 20th century and he's saying that what was actually happening in the early 20th century was that competition contrary to what we've been told by all the textbook writers was actually very vigorous and big established firms don't like this because competition means they could be knocked off their perch so the conservatism that Kolko is talking about is an economic conservatism of maintaining the economic status quo and what he's going to say is that at this time from 1897 to around 1901 or two there was a well-known merger movement in the US tremendous effort to engage in mergers most of these mergers failed and so once the mergers failed Kolko says you have the business firms now looking to the government to try to protect their profits because they are overwhelmed by competition and indeed Kolko says this that standard oil was not like the only game in town he says this in 1899 there were 17 petroleum refiners in the United States only one of whom was of any consequence over the next decade the number increased steadily to 147 refiners until 1900 the only significant competitor standard was the pure oil company by 1906 it was challenging standards control over pipelines by constructing its own and in 1901 associated oil of California was formed with 40 million dollars capital stock in 1902 the Texas company was formed with 30 million dollars capital and in 1907 Gulf oil was established with 60 million dollars capital in 1911 the total investment of the Texas company Gulf oil tied water associated oil union oil of California and pure oil was 221 million from 1911 1926 the investment of the Texas company grew 572 percent Gulf oil 1022 percent tied water associated 205 percent union oil 159 percent and pure oil 1,534 percent it was very difficult he says for top firms to maintain their positions in many sectors and many industries in the United States in the late 19th century we see this in oil, steel, iron automobiles, agricultural machinery copper, meat packing and telephone services now this is the strong this is Colco at his strongest this stuff about de-concentration ratios in the 19th century is very very valuable corrective to the standard old story about one guy with a cigar dominating the whole economy this is very very important but his wider thesis I more or less accepted this for a while and I'm a little bit more skeptical now as I look back on it and there are two things I would refer you to now unfortunately Brian Kaplan's comments are hard to find this is an article co-authored by Rob Bradley in the independent review and it's called something like Colco Revisited 2013 should be easier to find and he goes back and looks at the evidence that Colco has that really regulation was totally dominated by industries they wanted the regulation because it boosted their competitive position so he claims they wanted it this was not wise public servants carrying out the common good it was actually dominated by the big firms it turns out there are weaknesses in the argument so it turns out for instance when you look closely at Colco's argument it looks more likely that what's really happening is that business firms don't like the crazy quilt patchwork of regulations in all the different states and they would rather if they have to have regulation they'd rather have it be uniform and imposed by the federal government but that's not the same thing as saying we like regulation it's given that these are our choices this is what we would prefer or he'll say look even the railroads themselves said they favored having a government commission well yeah because what was the alternative so for example he cites Chauncey Depew who was the attorney for the New York Central Railroad and he says Chauncey Depew prefers a government commission so you see the businesses wanted this regulation because it gave them some kind of advantage but what Depew says in his memoir in 1922 is it seemed to me that it was either a commission or government ownership well that puts rather a new light on things doesn't it it's not that he just arbitrarily woke up one day and said we need a government commission it was that if he didn't have a government commission the government was going to take over the railroad so he said you know what I'll take the commission well that's different I think from what Colco is saying then also he's got in the Bradley article they dig out a quotation by James J. Hill and Colco it turns out totally mangles this statement by Hill he inserts ellipses all over the quotation to make it say what Colco wants Hill to have said but when you restore the words that are omitted by those ellipses Hill is saying like the opposite which makes you think that you can't trust this guy you have to actually now go back and review all the quotations in Colco so I think there is some merit to what he's saying and I do think there are some circumstances where business firms think they can use regulation to harm their smaller competitors or whatever but that doesn't mean that they wouldn't necessarily just prefer a laissez-faire situation it means that given that such and such intervention is coming we might as well turn it to our advantage that's still a valuable thesis but I don't think the evidence is quite as strong for his strong thesis as he might like it to be so anyway that has been a bit of a potpourri but it's a lot of stuff that I certainly didn't know when I was in college so I hereby hand it over to you thank you very much